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Chapter 2: Strategy

Competitive strategy is about being different to deliver more unique and better value to
the customer. Please read the example of Timbuk2 on page 50-51 of the textbook.
A strategy that is sustainable needs to create value for the firms shareholders (equity
owners) and stakeholders (individuals and organizations that are affected by the firms
actions). Thus, a firms strategy must not only focus on economic viability, but also the
environment and social impact of its actions.
The operations and supply-chain strategy coordinates operational goals with the higher
goals of the organization. Besides the basic competitive dimensions of cost, quality,
delivery speed (response time), and flexibility mentioned in Chapter 1, other competitive
dimensions are reliability, changes in volume, new product introduction speed, and other
product-specific criteria. Usually, there are trade-offs that need to me made among
these dimensions.
Operations and supply-chain strategies need to be evaluated relative to their riskiness.
Supply-chain disruptions are unplanned and unanticipated events that disrupt the normal
flow of goods and materials. Risks can be categorized along two dimensions: supplychain coordination risks and disruption risks.
One must identify the potential
interruptions, assess the potential impact of the risk, and develop plans to mitigate the
risk.
Part I: Attacking and Defending through Operations (not from the textbook)
Consider the following questions:

Why are small companies sometimes able to come out of nowhere and, without the
benefit of economies of scale and market power, successfully attack large,
entrenched competitors?

Why didnt those powerful competitors react more promptly and vigorously to such
attacks even after extended periods of time?

How have some companies, in contrast, been able to defend themselves


successfully?

The answer lies in the surprising power of operations-based strategies: Such strategies
reinforce a companys chosen approach to differentiating itself from its competitors; they
are inherently difficult and time consuming for others to imitate and impossible to buy;
and they are less visible to outsiders, and therefore less likely to trigger immediate

counter-attacks. Let us look at several cases:


Case 1: Southwest Airlines
Read pages 39-40 of the text (last para on Page 39 and the first para on page 40) and
add the following information to it.

1971: Began in Dallas, with a wing and a prayer

Began service outside Texas at end of 1970s

1980s: Steady expansion, emphasizing direct, no frills service and egalitarian


workforce policies

1992: 7th largest (and only profitable) U.S. airline

Its strategy was low-cost, point-to-point service between midsize cities and secondary
airports in large cities.
Case 2: Australian Paper Manufacturers

1986: entered the fine paper market in Australia

Its domestic competitor, APPM, had a 75% SOM, a low cost position, owned two of
Australias three largest paper distributors. and was backed by a big conglomerate

1990: APM had taken a third of the domestic market, was operating its newly rebuilt
paper plant at capacity, and had announced plans to expand

1993: APPM capitulated--selling all its paper operations to APM and exiting the
business

Its strategy was higher quality and faster response.


Case 3: Crown Equipment Corp. Crown Equipment Corp.

Entered the forklift truck business in 1957 (total sales <$1 mill.), with a small, manual
model.

Thereafter, entered segment after segment, each time taking on larger competitors
and winning substantial market shares.

Each time it differentiated itself with superior design (aesthetics and ease of
operation), at a premium price.

Today is the third largest producer in the U.S. (even though it only produces electric
trucks).

Its strategy was better design and customized products.


Case 4: Wal Mart

Went public in 1972, when it had only 30 discount stores in rural Arkansas, Missouri
& Oklahoma.

Steadily expanded around that base, emphasizing low cost operations, egalitarian
workforce policies, and a tightly integrated supplier/logistics system.

Built state-of-the-art I.T. systems and capabilities

By 1987 had 1200 stores (~ half as many as Kmart), and was approaching its
strongholds in major cities.

By 1993 was in Kmarts face and half again as big.

Its strategy was low cost operations.


Case 5: U.S. versus Japanese Auto Manufacturers
There original strategy was fewer defects and more reliable autos.
Reasons for Success and Failure
In all of these cases, the obvious questions are

Why did the large, powerful, entrenched competitors prove to be so vulnerable?

Why didnt they react faster when the threat became clear?

Why were they apparently unable to mount an effective counterattack?

Why werent they able to learn from--or even copy--the innovative practices of the
upstart?

While the counter attacks, if any, were not successful in the cases described above, here
is a case of a successful counter-attack:

American Connector Co. (ACC, disguised name) learned that DJC, a Japanese
competitor, was planning to build a new factory in the U.S.

DJCs factory in Japan had, through a series of innovations, reduced the cost of
making comparable products by about 35 percent.

ACC immediately began planning a counter-attack:

initiated a major cost reduction program in the U.S., using DJCs example as
a source of new approaches
sold its customization capabilities and problem-solving services to
customers
reduced prices of products directly competitive with the ones DJC had tooled
up to build, starving its new plant

Attacking through operations: There are two broad approaches:


1. Operations--Based Strategy: Positioning: Addressing the needs of a different
market niche, and/or using a different process technology

Each business unit has its own strengths & weaknesses, and may choose to
compete in a different way

An operating system/organizations design enables it to deliver particularly strong


performance along certain dimensions, but limits its performance along others

Therefore, an operating system should be configured and managed so that it


provides superiority along dimensions that are competitively important, while
accepting lesser performance along those that arent

Seek competitive superiority through lower cost, better quality (performance), more
flexible/responsive, more dependable, and so forth

Operating System Decision Categories

Structure

Policies & Systems

Capacity

Work scheduling

Facilities

Quality systems

Equip. Technology

Human Resource Policies

Sourcing/Make vs. buy

Measurement & Reward systems, Product/process


development, and Resource Allocation & Organization

Every operating source of strength has an associated Weakness. By making a series of


such structural and infrastructural choices, you foster an ability to do certain things well,
but reduce your effectiveness at other things. And thus, a smart competitor can build an
attack around your strategic vulnerabilities, as long as there is a market for those
capabilities.
2. Operations-Based Strategy: Execution: Competing within an existing niche, and
using known processes, but doing it more effectively than your competitors can. This
involves being able to extract higher performance from a given operating system in a
given market niche than can your competitors, through the cultivation of superior
organizational capabilities e.g. getting down the learning curve
Southwest Airlines fast aircraft turnaround times
Boise Cascades fast plant build & start
APMs high quality and fast delivery times
Sustainability of Operations-Based Strategies: First, they are less visible to or
underestimated by competitors. Second, they are difficult to imitate, replicate, or
purchase as they could be complex systems of people and organizational processes (for
example, Japanese TQM and fast product development). Or they could involve
combinations of capabilities. Examples include Fedex (hub-and-spoke pickup/delivery
system, real-time package tracking system, direct access [via internet] customer
checking), and virtual order [electronic catalog & shipping]. Third, they are dynamic in
nature as leaders keep advancing.
Defending through Operations

Exploit (and sell) your own strengths, but not beyond the point of diminishing
returns.

Attack the inherent weaknesses in your opponents operations strategy.

React so quickly to a competitors attack, that it isnt able to get too far ahead of you
down the learning curve (e.g. Microsoft vs. Netscape).

Building Superior Performance


The role of operations in competitive strategy has changed dramatically. Operations
management used to be about being a good custodian of industry standard equipment
and methods and not messing up too badly (or without warning). In such situations, the
most important things were ones competitive positioning in the marketplace and the
relative power of suppliers, customers, substitutes, other competitors, and new entrants
(firms who might decide to do what you do and take a share of your market). But that is
not the case any more. Todays competitive landscape is characterized by ongoing,
relentless innovation; rapid changes (new niches, new tools, new players); and not just
random benchmarking or continuous attempts to improve - but focused, re-invention of
ones business. There is a more complicated game of chess where the players can
invent new regions of the board and new pieces, as well as the moves they are able to
make with them. There are Different types of capabilities: process-based (e.g.
Australian Paper), system-based (e.g. Frito-Lay), organization-based (e.g. Wal-Mart and
SouthWest Airlines), and paired (e.g. Federal Express).
Building superior capabilities requires time. You must identify and assess threats early
because emulating world class practices is not enough and the most dangerous threats
often come not from your larger, more visible competitors, but from smaller ones in other
countries and, often, in adjoining industries. Begin experimenting with capabilities and
developing them before you really need them. For example, Federal Express and
Hitachi Seiki (mechatronics).
Some Common Lessons in Operations-Based Attacks and Defenses
First, vulnerable defenders tended to view their competitors capabilities through the
distorting lens of their own operating approaches. Second, they put too much faith in the
power of static assets like size, patents, and asset base, reputation, brand name, and
tradition. They erroneously assume that required new capabilities could be bought,
licensed, or copied easily.
While effective defenders recognized that it takes a long time to develop major new
capabilities, they were constantly scanning the horizon for potential competitors and new
operating approaches. They Understood that winning the game is not enough, one
must also be able to spot, and quickly master, the introduction of a new game (e.g.
Federal Express and Microsoft confront the Internet).

Part II: Competitive Advantage and Operations Strategy (Some from the textbook
and some from outside)
Competitive Advantage is achieved by positioning yourself in a unique, defensible niche
in your market or industry, and/or developing capabilities along performance dimensions
that are both valued by customers and superior to those of competitors
The Strategy Hierarchy:

Corporate strategy: what businesses should we be in?

Business strategy: how should we compete?

Functional strategy: what should our facilities and it networks look like?

What competitive advantage(s) are you seeking?

Lowest price/cost: delivered vs. lifetime of the product/service

Highest quality: product/service performance, tolerances, purity, and customer


service

Most dependable/reliable: product or service, delivery or availability, field


service/repair

Most

flexible:

broad

product

line,

customized

products

&

services,

fast

response/delivery times

Most innovative: new products & services and latest technologies/methodologies

The competitive dimensions


The competitive dimensions of operations strategy thus include cost, product quality and
reliability, delivery speed, delivery reliability, coping with changes in demand (changing
volume), flexibility and new product introduction speed, and other product-specific
criteria (technical liaison and support, meeting launching date, supplier after-sale
support, and so forth). Since no organization can excel on all dimensions at the same
time, there is a need for determining competitive priorities based on tradeoffs. For
example, if we reduce costs by reducing product quality inspections, we might reduce
product quality.
Or if we improve customer service problem solving by cross-training personnel to deal
with a wider-range of problems, they may become less efficient at dealing with
commonly occurring problems. In the plant-within-a-plant approach,
Different locations within the facility are allocated to different product lines, each with its
own operations strategy.
Order Qualifiers and Winners: The Manufacturing-Operations Link
Some competitive dimensions are more important than others, and their importance
depends on your competitive environment and strategy. An order qualifier is a screening

criterion that permits a firms products to be considered as candidates for purchase by


customers. In other words, it is the minimum level that must be achieved in order to be
considered a viable candidate. An order winner is a criterion that differentiates the
products and services of one firm from another. In other words, it is the single most
important attribute to your targeted customers (that you must excel in). A brand name
car can be an order qualifier. Repair services can be order winners. Examples include
warranty, roadside assistance, and leases.
More on Superior Performance
Like any system, an operations organization cant do everything exceptionally well. So,
it must concentrate its resources on doing one or two of the most important things
exceptionally well. This implies that its operations strategy must be centered on a
dominant focus. A strong competitor with an operations advantage moves from
"acceptable range of performance on each competitive dimension (cost, quality/product
performance, dependability/reliability, flexibility, and innovativeness) to "superior
performance on dimensions with the highest priorities. An obvious prescription is to
build operations strategies that meet the qualifiers and excel on the winners. But theres
a problem: Things change, winners and qualifiers change, and jockey for position over
time. Consider the US auto industry in the late 1950s.

Order winner: price (& length!) => narrow product range

Japanese car imports competed first at low end, then progressively emphasized
quality

Quality/reliability became the new order winner!

Big scramble to catch up!

Now after many years, the US and European auto companies can deliver roughly the
same degree of quality as their Japanese counterparts, but once everyone is at the
same level on an order winner, it becomes an order qualifier! So whats the next order
winner going to be? Features? Fuel efficiency? Safety? Electronics? None of these
are particularly difficult to imitate. Toyota can now custom produce a car in Japan,
through its plants, in 5 days versus 12 weeks in the U.S. and Europe. Could this be the
next across-the-industry order winner? It is very difficult to imitate, and delivers value to
the customer, because operations are difficult (difficult to imitate), they can be great
sources of sustained advantage.
III. More from the Textbook: Productivity
Productivity is a common measure on how well resources are being used. Since these
are relative measures, they are meaningful if they are compared to something else.
Often, the comparison is with other companies.
In the broadest sense, it can be defined as the following ratio:

Outputs
Inputs

Total Measure Productivity =

Output Goodsservices produced


=
Inputs
All resources used

Partial measures of productivity =


Output or Output or Output or Output
Labor
Capital Materials Energy
Multifactor measures of productivity =
Output
.
Labor + Capital + Energy + materials